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Book

Negotiating Technology Contracts

Kit Burden, Duncan Pithouse, Mark O'Conor

Published: 2019
Pages: 240

eBook: 9781787423244

It is written with the benefit of DLA Piper’s unparalleled view of the global market for technology sourcing and outsourcing projects, and from acting both for customers and service providers in this space.

Negotiating technology-related contracts can be a long and energy-consuming business. For the uninitiated or uninformed, the significance of the points under discussion may be unclear, and it can often seem that contract negotiators are pedantic, obstructive or just plain unhelpful in terms of “getting the deal done”.

In this context, it is essential to have a clear understanding of just what each part of the contract is designed to deal with, what both the customer and service provider are seeking to protect, and what potential compromise solutions may be available. As a result, one can avoid unnecessary debate and move faster to reasonable positions that are acceptable to both parties.

This practical, how-to book seeks to explain the perspectives of both sides of the negotiating table on a clause-by-clause basis, clearly setting out the key points they will want to protect – and why – while also offering suggestions as to what they may be willing to concede or compromise upon. It is written with the benefit of DLA Piper’s unparalleled view of the global market for technology sourcing and outsourcing projects, and from acting both for customers and service providers in this space.

An invaluable negotiating guide, this edition will be of particular interest to anyone involved in technology-related contracts.

Table of Contents

Cover Cover 1
Title page 1
Copyright information 2
Table of contents 3
Introduction 7
1. Due diligence in outsourcing arrangements 9
1. Introduction 9
1.1 Overview of due diligence 9
1.2 Factors affecting the extent of due diligence conducted 10
1.3 Contract certainty 11
1.4 Due diligence is correct at the time it is done 12
1.5 The due diligence process 12
1.6 Types of due diligence information 13
2. The customer perspective 13
2.1 The due diligence the customer will perform 13
2.2 The customer attitude to due diligence as encapsulated by the terms of the contract 15
(a) Due diligence clause 15
(b) Sweeper clause 15
(c) No post-contract variation 16
(d) Contractualise financial stability 16
3. The service provider perspective 16
3.1 The due diligence the service provider will perform 16
3.2 Service provider attitude to typical contractual clauses 18
(a) Risk transfer 18
(b) Service levels 18
(c) Contractualising assumptions and dependencies 19
4. Potential solutions 19
4.1 Suitable period for due diligence 19
4.2 Blanket of confidentiality 20
4.3 Typical due diligence clause and bounded right to post-contract variation 20
4.4 Relief event mechanism 21
2. Service provisions 23
1. Introduction 23
2. The customer perspective 23
2.1 The services description 23
2.2 Linkage to request for proposal 24
2.3 Implied services 25
2.4 Customer dependencies 26
2.5 Acceptance and approvals 27
2.6 Warranty/post go-live 27
3. The service provider perspective 28
3.1 The services description 28
3.2 Linkage to request for proposal 28
3.3 Implied services 29
3.4 Customer dependencies 29
3.5 Acceptance and approvals 29
3.6 Warranty/post go-live 30
4. Potential solutions 30
4.1 The services description 30
4.2 Linkage to request for proposal 31
4.3 Implied services 31
4.4 Customer dependencies 32
4.5 Acceptance and approvals 32
4.6 Warranty/post go-live 32
3. Compliance with laws and regulations 35
1. Introduction 35
2. The customer perspective 35
2.1 What is a law for the purposes of this commitment? 36
2.2 Who should commit to comply with laws? 37
2.3 What should be delivered and provided in accordance with laws? 37
2.4 Which jurisdiction’s laws are being referred to? 38
2.5 What happens if there is a change in law? 39
3. The service provider perspective 39
3.1 What is a law for the purposes of this commitment? 39
3.2 Who should commit to comply with laws? 40
3.3 What should be delivered and provided in accordance with laws? 40
3.4 Which jurisdiction’s laws are being referred to? 41
3.5 What happens if there is a change in law? 41
4. Potential compromises 41
4.1 What is a law for the purposes of this commitment? 42
4.2 Who should commit to comply with laws? 43
4.3 What should be delivered and provided in accordance with applicable laws? 43
4.4 Which jurisdiction’s laws are being referred to? 44
4.5 What happens if there is a change to laws? 44
4. Service level agreements 47
1. Introduction 47
2. Service level models 47
2.1 Simple service level values 48
2.2 Pool Allocation Percentage Model 48
2.3 Service Credit Point Scheme 49
3. The customer perspective 50
3.1 The starting service levels 50
3.2 Do service credits apply, and, if so, with what cap? 50
3.3 What is included in the calculation of the at-risk amount? 51
3.4 Are service credits a ‘sole and exclusive’ remedy? 51
3.5 Termination triggers 51
3.6 Continuous improvement 52
3.7 Exclusions and relief 53
3.8 Linked obligations 53
4. The service provider perspective 54
4.1 The starting service levels 54
4.2 Do service credits apply, and, if so, with what cap? 55
4.3 What is included in the calculation of the at-risk amount? 55
4.4 Are service credits a ‘sole and exclusive’ remedy? 56
4.5 Termination triggers 56
4.6 Continuous improvement 57
4.7 Exclusions and relief 57
4.8 Linked obligations 59
5. Potential solutions 59
5.1 The starting service levels 59
5.2 Do service credits apply, and, if so, with what cap? 59
5.3 What is included in the calculation of the at-risk amount? 60
5.4 Are service credits a ‘sole and exclusive’ remedy? 60
5.5 Termination triggers 61
5.6 Continuous improvement 61
5.7 Exclusions and relief 62
5.8 Linked obligations 62
5. Use of agile methodologies 65
1. Introduction 65
1.1 Agile contracting 65
1.2 The waterfall approach 66
1.3 Agile development 67
1.4 How agile works in practice 68
2. The customer perspective 70
3. The service provider perspective 71
4. Potential solutions 71
4.1 The requirements 71
4.2 What about stakeholder attitudes? 71
4.3 Using the contract to help 72
4.4 Clear rules of the game 72
4.5 Performance management during the term 73
4.6 The right commercial model 73
4.7 Fault 74
4.8 The ‘what if’ scenarios 75
6. Warranties 77
1. Introduction 77
2. The customer perspective 78
2.1 Performance warranties 78
2.2 Performance of the services in accordance with a performance standard 78
2.3 Warranty as to fitness for purpose 79
2.4 Adherence to the service levels 79
2.5 Compliance with specification 79
2.6 Commitment to timescales 80
2.7 Warranties regarding intellectual property rights (IPR) 81
2.8 Use of open source 81
2.9 Security 81
2.10 Data protection and privacy 82
2.11 Compliance with laws 82
3. The service provider perspective 82
3.1 Performance warranties 82
3.2 Performance of the services in accordance with a performance standard 83
3.3 Adherence to service levels 83
3.4 Compliance with specification 84
3.5 Commitments to timescales 85
3.6 Warranties regarding IPR 85
3.7 Use of open source 85
3.8 Security 86
3.9 Data protection and security 86
3.10 Compliance with laws 86
4. Potential compromises 87
4.1 Performance of the services in accordance with a performance standard 87
4.2 Warranty as to fitness for purpose 87
4.3 Adherence to the service levels 88
4.4 Compliance with the specification 88
4.5 Commitments to timescales 89
4.6 Warranties regarding IPR 89
4.7 Use of open source 89
4.8 Security 90
7. Relief/excused events 93
1. Introduction 93
2. The customer perspective 95
3. The service provider perspective 97
4. Potential solutions 98
8. Intellectual property provisions 101
1. Introduction 101
2. The customer perspective 103
3. The service provider perspective 105
4. Potential solutions 108
9. Data protection liabilities 111
1. Introduction 111
2. The customer perspective 112
3. The service provider perspective 113
4. Potential solutions 114
10. Benchmarking in outsourcing transactions 119
1. Introduction 119
1.1 Why would the customer need to include such provisions in its outsourcing contract? 119
1.2 To benchmark or not 120
1.3 Who can undertake the benchmark? 120
1.4 Who and what will be compared against? 121
1.5 How involved can the parties be? 121
1.6 What does ‘good’ look like? 121
1.7 What happens next? 122
2. The customer perspective 122
2.1 Required provision or negotiation chip? 122
2.2 Let’s be clear, this is a customer-centric concept 122
2.3 How often should the right be exercised? 122
2.4 Approach to the comparison 122
3. The service provider perspective 123
3.1 When can a service provider welcome a benchmarking process? 123
3.2 How often should the right be exercised? 123
3.3 Approach to the comparison 123
4. Potential solutions 124
4.1 Sensible representative samples 124
4.2 Setting the benchmark 124
4.3 Implementing the benchmarker’s recommendations 124
4.5 Who pays for the benchmarking? 126
11. Setting limits of liability 127
1. Introduction 127
1.1 Why do we limit liability in contracts? 127
1.2 What should the limit be? 129
1.3 A model for a liability clause 130
2. The customer perspective 132
3. The service provider perspective 134
4. Potential solutions 135
12. Excluded liabilities 139
1. Introduction 139
2. The customer perspective 140
3. The service provider perspective 141
3.1 Indirect/consequential losses 141
3.2 Loss of profit/revenue 141
3.3 Loss of anticipated savings/benefits 142
3.4 Loss of goodwill/reputation 142
3.5 Loss or corruption of data 143
3.6 Amounts payable to third parties 143
4. Potential solutions 143
4.1 Indirect/consequential loss 143
4.2 Loss of profit/revenue 144
4.3 Loss of anticipated savings/benefits 146
4.4 Loss of goodwill/reputation 146
4.5 Loss or corruption of data 147
4.6 Amounts payable to third parties 147
13. Unlimited liabilities 149
1. Introduction 149
2. The customer perspective 149
2.1 Breach of intellectual property rights (IPR) 150
2.2 Breach of confidentiality 150
2.3 Data protection liabilities 151
2.4 Data and IT security obligations 151
2.5 Official fines and sanctions 151
2.6 Wilful default/abandonment 152
2.7 TUPE/Acquired Rights Directive 152
2.8 Breaches of law or regulation 153
2.9 Gross negligence 153
3. The service provider perspective 154
3.1 Breach of IPR 154
3.2 Breach of confidentiality 155
3.3 Data protection liabilities 155
3.4 Data and IT security obligations 155
3.5 Official fines and sanctions 156
3.6 Wilful default/abandonment 156
3.7 TUPE/Acquired Rights Directive 157
3.8 Breaches of law or regulation 157
3.9 Gross negligence 157
3.10 Payment of the contract charges 158
4. Potential compromises 158
4.1 Breach of IPR 159
4.2 Breach of confidentiality 159
4.3 Data protection liabilities 159
4.4 Data and IT security obligations 160
4.5 Official fines and sanctions 160
4.6 Wilful default/abandonment 161
4.7 TUPE/Acquired Rights Directive 161
4.8 Breaches of law or regulation 161
4.9 Gross negligence 162
4.10 Payment of the contract charges 162
14. TUPE in outsourcing agreements 163
1. Introduction 163
1.1 Overview of TUPE regulations 163
1.2 How TUPE applies 163
1.3 The European legal backdrop 164
1.4 When TUPE applies 165
1.5 Step 1: Does the legislation apply? 165
(a) The tests themselves 165
1.6 Step 2: Who transfers? 166
1.7 Step 3: What transfers? 166
1.8 Step 4: What are the information and consultation requirements? 166
2. The customer perspective 167
2.1 Can TUPE be avoided? 168
2.2 Is it desirable that TUPE is applied? 169
3. The service provider perspective 170
3.1 New supplier view 170
3.2 The incumbent supplier’s view 171
3.3 Cherry picking and lemon dropping 171
4. Potential solutions 172
4.1 Disagreement as to TUPE application 172
4.2 First time outsource 172
4.3 First time offshore 173
4.4 Incumbent to new supplier transfer 174
4.5 What if there is more than one new supplier? 174
4.6 Information 174
4.7 How is this captured contractually? 175
15. Termination rights 177
1. Introduction 177
2. The customer perspective 178
2.1 Insolvency 178
2.2 Material breach 179
2.3 Breach of specified clauses 181
2.4 Service level triggers 181
2.5 Required by law/regulation 182
2.6 Impact upon reputation 183
2.7 Termination for convenience/upon notice 183
3. The service provider perspective 183
3.1 Insolvency 184
3.2 Material breach 184
3.3 Breach of specified clauses 184
3.4 Service level triggers 185
3.5 Required by law/regulation 185
3.6 Impact upon reputation 185
3.7 Termination for convenience/upon notice 185
4. Potential solutions 186
4.1 Insolvency 186
4.2 Material breach 186
4.3 Breach of specified clauses 187
4.4 Service level triggers 187
4.5 Required by law/regulation 187
4.6 Impact upon reputation 188
4.7 Termination for convenience/upon notice 188
16. Step-in provisions 191
1. Introduction 191
2. The customer perspective 191
2.1 Step-in triggers 192
2.2 What steps the customer can take when stepping-in 193
2.3 What is the duration of the step-in? 193
2.4 Cost consequences of step-in 194
2.5 Step-out 194
3. The service provider perspective 195
3.1 Step-in triggers 195
3.2 The steps that can be taken as part of the step-in 196
3.3 Responsibility for the step-in and impact on the agreement 196
3.4 Duration of the step-in 197
3.5 Commercial consequences of step-in 197
3.6 Step-out 198
4. Potential solutions 198
4.1 Step-in triggers 198
4.2 The steps that can be taken during step-in 199
4.3 Duration of step-in 199
4.4 Commercial consequences of step-in 200
17. Audit rights 201
1. Introduction 201
2. The customer perspective 202
2.1 Frequency 202
2.2 Scope 202
2.3 Conditions 202
2.4 Auditors 203
2.5 Cost 203
2.6 Liability 204
2.7 Consequences 204
3. The service provider perspective 204
3.1 Frequency 204
3.2 Scope 204
3.3 Conditions 205
3.4 Auditors 205
3.5 Cost 206
3.6 Liability 206
3.7 Consequences 207
4. Potential solutions 207
4.1 Frequency 207
4.2 Scope 207
4.3 Conditions 208
4.4 Auditors 208
4.5 Cost 209
4.6 Liability 210
4.7 Consequences 210
18. Dispute resolution provisions 211
1. Introduction 211
2. The customer perspective 211
2.1 Escalation 211
2.2 Mediation and arbitration 212
2.3 Referral to courts 212
2.4 Ability to appoint an expert 213
2.5 Beneficiaries and herding of claims 213
3. The service provider perspective 214
3.1 Referral to courts 214
3.2 Ability to appoint an expert 214
3.3 Beneficiaries and herding of claims 214
4. Potential solutions 215
4.1 Referral to courts 215
4.2 Beneficiaries and herding of claims 215
19. Negotiation in practice 217
1. Background 217
2. Initial considerations 218
3. The procurement process 219
3.1 Number of bidders 219
3.2 Request for proposal 220
3.3 Key terms versus full contract 220
3.4 Process to downselection 221
4. Key contract aspirations of the parties 222
5. Likely areas for key debate and potential solutions 225
5.1 Acceptance process 225
5.2 Timeliness of delivery 225
5.3 Warranty/service level agreement provisions 226
5.4 Liability clauses 226
20. Conclusion 229
Index 234

Kit Burden
Partner, DLA Piper
[email protected]

Kit Burden is a partner at DLA Piper and is co- head of its global Technology Sector. He has been advising clients in relation to technology and sourcing mandates for nearly 30 years, and is involved in projects and with clients in jurisdictions all around the world. He acts for both major buy- side and sell- side clients, including some of the best- known organisations in the technology sector and many household- name brands. He has been awarded numerous accolades over the years, including Legal Advisor of the Year (Global Sourcing Association), UK Technology Lawyer of the Year (Legal Experts), and Strategic Advisor of the Year (Global Sourcing Association) and has for many years been listed in Tier 1 for IT and outsourcing matters in both the Legal 500 and Chambers legal directories. He is the co- author and editor of three previous books on IT contracts, legal protection of computer software and outsourcing, published respectively by Sweet and Maxwell, EMIS and Globe.

Mark O’Conor
Partner, DLA Piper
[email protected]

Mark O’Conor is a partner at DLA Piper and heads its Client Group for the London office, as well as being a past managing partner of the UK firm. He started his career at Bird and Bird before moving to DLA Piper, where he has practised for the last 15 years. He works with a diverse set of clients in both the private and public sectors, including a wide range of household name organisations. He has also had a longstanding involvement with the Society for Computers and Law (SLC), and is the current chair of the board of trustees for the SCL. He is a frequent speaker and writer on technology and legal themes and is listed in both Chambers and Legal 500 as a leading technology lawyer.

Duncan Pithouse
Partner, DLA Piper
[email protected]

Duncan Pithouse is a partner in the London office of DLA Piper, and heads the UK Technology and Sourcing Group. His focus is on technology contracts and outsourcing agreements, with a particular focus upon work in highly regulated sectors such as banking and insurance. He is a frequent contributor of articles and thought leadership on technology legal matters, and is recognised as a leading practitioner in the various legal directories. His clients include some of the world’s largest financial services institutions and insurance companies.

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